Capital Crunch Sparks Crowdfunding Campaigns

Capital has dried up in the cannabis industry, but companies still need investors and their money. This is sparking a renewed interest in crowdfunding.

Crowdfunding platforms have become more user-friendly and also seem to be vetting potential clients more closely than in the past. Companies are also finding that many platforms allow for debt deals versus straightforward equity deals.

An added bonus? Payouts are often faster than the long, tortuous venture capital dance.

It’s also growing. Technavio reported that the crowdfunding market is expected to grow by $196.36 billion during 2021-2025, expanding at a CAGR of over 15%.

Crowdfunding Basics

Typically, companies use crowdfunding to raise a relatively small amount of money online with a larger group of investors. For example, a crowdfunding investor could invest as little as $500, whereas a private equity company may only look for investments that register in the millions.

While it used to get less respect than raising money in traditional capital markets, that is changing.

“Crowdfunding is a way to address a whole new audience of unaccredited investors, fans of the company that was the issuer trying to raise money, and ones that could write much smaller checks, $500, $1,000, $2,000, $2,500,” Arcview CEO Jeff Finkle said. “And essentially what it did is open up a new line of potential capital to fund cannabis businesses, at a time when it was needed.”

Finkle also noted that the investing community is now trying to refer to it as “online capital raising” rather than crowdfunding, but it remains the same idea regardless of the title.

Oscar Jofre, co-founder, president, and CEO at private market platform KoreConX said that the term crowdfunding confuses some investors, as they think of GoFundMe or Kickstarter.

“Venture capital is temporarily closed. I don’t care how anybody slices it. It’s temporarily closed,” Jofre said. “Online capital formation is open for business. Is it for everybody? The answer’s no. Can anybody use it? The answer is yes.”

Success Story

Chris Becker of Honeybee Collective said he attempted to go the venture capital route, where bankers pore over a company’s financial records and take months to make decisions. He noted that his company is employee-owned with a mission to help build community wealth – attributes that weren’t desirable to buttoned-up bankers.

Instead, the cannabis company went to the crowdfunding community to raise the capital it needed. Becker chose Mainvest as his crowdfunding platform, and the company raised $241,800 with some investors able to spend as little as $100.

“We raised debt. So early investors got a two times return on their investment over what turns out to be a five-year period,” Becker said. “Later investors get a one and three-quarter times return. So it works out to roughly 12% interest to us for that money, which is a really great rate. At the time we were a pre-revenue startup with a little bit of seed money, and that was it.”

He also noted that Honeybee was able to get the money 75 days after the launch of the campaign on Mainvest. Venture capital people were promising him 90 days, at best, but more likely six months – if ever.

Becker believes his success was helped by having an engaged customer base and good timing. When Honeybee was raising, he said people had pandemic assistance checks and bitcoin hadn’t collapsed.

However, he expects to do another raise and will likely return to Mainvest to do it, though he might switch from the revenue-sharing note to an equity deal.

Crowdfund Realities

One recurring theme when discussing crowdfunding is that while the success stories are front and center, there are just as many unsuccessful raises. It all comes down to marketing. A brand or company that already has a strong customer bond or deep email list will do better than one that is still trying to introduce itself to the market.

Once an online capital-raising page is live, companies need to drive traffic to the site. If the company has an email list with more than 1,000 names, great; if it’s 100 people, not so great.

If a company doesn’t have that built-in reach, it will have to pay for a marketing campaign, which will cut into the money raised.

“In general, you could spend 40%, or 50% of the money you make on ads driving people to the site. Now, it could be totally worth it, because you’re generating awareness,” said Liz Wald, chief strategy and digital officer of Good Earth Organics. “The other thing is you, you know, you have to have a good chunk of money to run the initial ads, because you can’t start withdrawing any of the capital until you’ve met the threshold.”

The company may need to create a marketing video to help promote the product or pay for an email marketing campaign to get the word out. Wald noted that Facebook or Twitter ads are essentially ineffective, but email campaigns tend to work and they cost money.

Wald, who previously served as vice president of technology at Indiegogo and director of marketplace development at Etsy, also pointed out that many companies don’t realize that there are also legal costs as well.

Online capital raising is touted as a cheap way to raise money, but the reality can be the opposite. She also noted that it’s a numbers game.

“You may get 100,000 people interested, but that goes into the funnel and maybe 5,000 go to the next step. You need to convert these people into actual investors,” Wald said. “These investors realize they have to keep clicking and giving information like social security numbers. These platforms have to address the KYC (know your customer) aspect of investing. They can’t just accept anyone willy-nilly.”

In other words, this isn’t like Kickstarter where someone just whips out a credit card. Those extra steps often cause some potential investors to reconsider.

Online Platforms

Mainvest CEO Nick Mathews said his platform offers opportunities for many industries, including cannabis. He said the average raise in cannabis on his platform is $250,000, but it varies between $100,000 and $500,000.

The company charges an administrative fee of 4.5%, but other expenses can push that higher with an average cost of about 5.8% for the raise.

The platform currently has three cannabis businesses raising money.

• Snowbelt Cannabis in New York wants to raise $80,000 to build a cultivation facility.
• Coastal Roots in Massachusetts is trying to raise $50,000 to open a social equity-owned, cannabis product manufacturing facility.
• Santa Fe-based Endo Cannabis is raising $85,000 to build out the remainder of its grow rooms, purchase additional display cases in the existing dispensary, and scale its production and manufacturing capacity.

All three companies are offering a revenue-sharing note. That means the company will share its revenue with the investors until the offered return is paid to the investor.

A company must raise a certain amount in its offering before the platform shows it as an investment opportunity to the larger online audience.

“In our opinion, there’s no better way to do that than have the community have the opportunity to come in, vote with their wallets, say they want a business there, and as a business hits that threshold, we call it the community vetting process,” Mathews said. “When we see that happening, that’s what opens the comfort level to then expanding that offering to our investor base and to the broader investor base of retail investors across the country.”

His team also guides less sophisticated companies through the process, but though savvy fundraisers choose Mainvest as well.

Finkle said he believes crowdfunding works best as a post-seed raise of Series A. He said, “Seed raises are usually family and friends when a company really has nothing to show yet, but the group believes in the founders and is trusting them to deliver.” He went on to say that crowdfunding works when the company can bring some numbers to the table as evidence the founders know what they are doing and give an indication of where and how the company will use the investor money. Post-seed and Series A are great places for crowdfunding, after that he thinks companies need to level up to a larger investor group.

Arcview launched its equity crowdfunding platform in May 2022 and while there are no current companies listed on the platform, a psychedelic company called Ei. Ventures raised $20 million.

Cannabis Platforms

While Mainvest is home to many industries, Arcview caters to the cannabis crowd. Fundanna also focuses on fundraising for cannabis and hemp startups.

WeFunder provides a platform for many industries, but it has carved out some space for cannabis, including campaigns for cannabis payment company Staack, cannabis herb company Bud Love, and Novus Cannabis MedPlan, which provides cannabis insurance. Cornbread Hemp raised $392,000 in 2020 on the platform and has continued to update its investors on the site.

“We have completed our Reg D fundraising efforts with $1,675,000 raised,” Cornbread Hemp recently said on the site. “To close out our current $2mm seed round, we will be opening up another Wefunder round soon for the remaining $325,000.”

Uncle Arnie’s, a best-selling California cannabis beverage brand, launched a Regulation CF equity crowdfund on SeedInvest on Dec. 12, 2022, and recently closed it after raising $437,251. The minimum investment was $1,010.

One potential investor groused about the company’s $20 million valuation when it has only logged $3.5 million in sales since 2020. The company said, “We have grown from the #8 brand in January 2022 to the #1 brand in January 2023 and in the last 30 days have the #1-5 top-selling drinks in CA. We think a 3x projected 12 months revenue with the growth we’ve seen over the last year justifies this multiple. In addition, we have formed strategic partnerships with everyone in our supply chain.”

In Closing

Viridian Capital Advisor’s weekly Deal Tracker recently showed that cannabis capital raises are off to a multi-year low.

“Only $5.9 million has closed through the first three weeks of the year compared to $157.2 million last year. The capital crunch is intensifying. We have had four consecutive weeks with no closed debt deals, and year-to-date, there have been no U.S. capital raises. We haven’t seen either of these occurrences since before 2017. Total capital raises are off to the slowest start since we began tracking the market in 2015.”

Crowdfunding, or online capital raising, at least provides company with a viable alternative.